Q3 2023 Elevance Health Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the <unk> third quarter earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session, where participants are encouraged to present a single question.
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Remainder todays conference is being recorded I would now like to turn the conference over to the company's management. Please go ahead.
Good morning, and welcome to <unk> third quarter 2023 earnings call. This is Steve to now Vice President of Investor Relations and with US. This morning on their earnings call are Gail Boudreaux, President and CEO , John Gallina, our CFO , Peter <unk> President of Carillon Morgan Kendrick Pres.
Didn't have our commercial and specialty health benefits business, and Felicia Norwood, President of our government and health benefits business Gail.
Gail will begin the call with a brief discussion of the quarter and recent progress against our strategic initiatives. John will then discuss our financial results and outlook in greater detail.
After our prepared remarks, the team will be available for Q&A. During the call. We will reference certain non-GAAP measures reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website <unk> Dot com. We will also be making some forward looking statements on this call listeners are cautioned that these statements are subject to certain risks.
And uncertainties, many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC I will now turn the call over to Gail.
Thanks, Steve and good morning, everyone. Today, we're pleased to share the elegance health delivered another solid quarter of financial and operational performance, reflecting the strength and resilience of our diversified portfolio of businesses.
Third quarter GAAP earnings per share was $5 45, including.
Adjusted earnings per share was $8.99, reflecting growth of approximately 20% over the third quarter of 2022.
Our results demonstrate our ability to execute on our enterprise strategy.
<unk> whole health solutions that are affordable personalized and simple.
Based on our strong year to date results and confidence in our outlook we are.
We're increasing our guidance for adjusted earnings per share to be greater than $33 for 2023.
Which includes incremental investments planned for the fourth quarter that will accelerate our strategy and enhance the performance of our Medicare advantage business.
It is the strength and resilience of our diverse businesses that provides comfort in our outlook, while the earnings power of our health benefits and Caroline divisions provides us the confidence to reiterate our commitment to our long term target compound annual growth rate and adjusted earnings per share.
12% to 15%.
Let me now turn to some highlights from our business segments.
Starting with our health benefits Division, which delivered robust third quarter results as we continue optimizing our first set of businesses, while responding to a dynamic and evolving business environment.
In our commercial risk business, we are successfully executing on our goal to deliver operating margins in line with pre pandemic norms.
Retention has been consistent with our expectations and we're pleased with our progress, which we expect will extend well into 2024.
In the employer market, we're delivering differentiated value matters for employers affordability experience and simplicity.
Over the past three years, we've become the sole source medical benefits provider for 32 of our national clients, including nine additional customers, who will be consolidated in their coverage with us effective January 2024.
For large employers.
We continue to deliver differentiated value and are seeing employers move away from point solutions and slice offerings to selecting <unk> as their strategic partner for the integration of all of their medical benefits.
Consistent with these results our advocacy solutions business, which provides personalized guidance and support to help members navigate the complex health care system and optimize their health and wellbeing will add 37, new clients in 2024.
Covering more than 550000 members.
This includes two large employers who are returning to elegance house. After previously testing third party advocacy vendors.
In the individual market, we are seeing strong growth in plans that offer affordable and comprehensive coverage designed around the needs of consumers and our communities, including those transitioning from Medicaid to <unk>.
Individual ACA coverage.
Year to date, our individual membership has grown by 27%.
Through the first half of this year the latest period for which industry data is available our individual ACA membership growth rate more than tripled that of our competitors and our 14 Blue States.
Our government business also posted a strong quarter in our Medicaid business rates are actuarially appropriate, but we are absorbing a membership headwind related to the pace of Medicaid redetermination.
Especially in states that have adopted accelerated timelines.
Nearly three quarters of all Medicaid beneficiaries terminated in our markets to date have less coverage for administrative reasons and 37% of the attrition from our own health plans has been driven by individuals under 18 years of age many of whom may still be eligible for med.
<unk> benefits.
We are doing all we can to ensure continuity of coverage for as many consumers as possible working closely with our state partners.
Individuals eligible for Medicaid retain coverage, while also offering affordable ACA.
Change plans and nearly all of our Blue counties.
We are seeing encouraging signs in some of our Blue States, where we offer Medicaid and commercial coverage, we have seen 30% or more of our Medicaid members, who were terminated prior to the end of June return or retain coverage with elegance health, albeit with gaps in coverage that can extend for several months.
We expect re enrollments accelerate in the coming quarters as we continue with our omnichannel approach to outreach and engagement ensuring our members are aware of their options.
Accordingly, we anticipate the rate of membership attrition associated with Redetermination will slow considerably in the coming quarters.
In Medicare we continue to offer high quality plans that provide seniors access to comprehensive and coordinated care and we're committed to doing so for the long term.
We were disappointed however, with our stars performance for measurement year, 2022, which is the basis for star ratings that will impact the 2025 payment year, and specifically with our declining consumer survey scores and the way in which CMS applied a new statistic.
Methodology that resulted in significant increases to many star measure cut points.
To improve our performance in future periods, we have already commenced investments in four primary areas service.
Product network access and operations.
For example in July of this year, we built on the success of our innovated advocacy model in the employer market by adapting it for the unique needs of Medicare eligible consumers.
This new program My Health advocate is a comprehensive personalized and relationship based customer service model that enables our members to effectively navigate the health care system their benefits and ultimately to improve their overall health and wellbeing.
Furthermore, we have enhanced our core and supplemental benefits to reduce members out of pocket cost per prescription medications simplified our dental benefits and strengthened our grocery and over the counter benefits.
We're also simplifying consumer and provider experiences through the automation and elimination of certain prior authorizations accelerating our work with value based care provider partners and improving clinical decision appeal rates.
Collectively these actions and the ongoing investments should enhance our performance in key star measures and ultimately increase member satisfaction with our plans.
We are actively pursuing all our options and exploring actions to mitigate the direct financial impact on payment year 2025, including two contract diversification.
Operating efficiency and capital deployment alternatives we.
We will provide updates on our action plans and progress in future engagements in advance of 2025.
Moving to Caroline we are pleased with our momentum in the business as it continues to advance its strategy of integrated physical behavioral and social and pharmacy services to deliver whole health affordably.
Caroline services delivered particularly strong growth in operating earnings led by the expansion of our post acute care management solutions.
We also extended our service offerings in adjacent areas, including durable medical equipment and wound care further enhancing our customer value proposition and differentiation.
Caroline or acts continues to make significant progress towards the near term rollout of multiple new capabilities that will enhance the affordability and experience of pharmacy for our members and Carolina Rx customers.
One of these capabilities is ensure X and integrated benefit for commercial pharmacy members that compares the benefit cost for over 50 covered generic medications to our network of multiple cash discount cards.
Then automatically applies the lowest cost in any pharmacy.
The program launches early next year, and we will save our customers money, while enhancing their experience and sure Rx will also capture claim data to ensure full safety checks and maintain the integrity of our data.
We're also.
Pleased with the integration of bio plus which continues to track ahead of schedule and we expect to begin migrating specialty scripts from our legacy pharmacy platform early next year.
Finally, we remain on track to launch our advanced home delivery capability in the fourth quarter.
Together these businesses will allow us to deliver even better consumer experiences and enhance affordability, while creating additional shareholder value over time.
Now I'd like to address the actions we took during the quarter to transform our cost structure and enhance our operating efficiency.
With affordability of health care of Paramount concern for all of our customers and more uncertainty in the business environment heading into 2024.
We took proactive and decisive action in the third quarter to increase our financial and operational flexibility and to ensure we will remain well positioned to deliver on our commitments to all of our stakeholders.
Specifically, we completed a strategic review of our operations assets and the investments we've made over the years to identify opportunities to increase efficiency and enhance focus all while driving greater impact from our programs at scale.
This resulted in workforce and asset optimization that will make us more nimble focused and efficient and allow us to concentrate our resources on the most promising programs, while further optimizing our physical footprint.
The pace of technological innovation is rapid and accelerating and we are committed to keeping pace.
As we pivot away from some legacy projects, including those tied to systems that are being replaced with cloud based models.
We are also scaling key digital programs for greater impact.
One example is health O S. A key enabler of our strategy that is helping to change the way care providers deliver care, while reducing administrative burden.
He also asked is our digital platform for health that allows us to exchange data bi directionally with providers in real time and is central to a number of our priorities, including our approach to value based care.
We are also in the early stages of rolling out new AI capabilities and large language models that are helping us personalized member experiences and automate administrative tasks.
We're excited about the possibilities of the rapid technological innovation that is underway and are committed to continuous improvement innovation and the ongoing optimization of our processes reengineering much of what we do while delivering more personalized experiences to our members along the way.
Before I close.
And are committed to continuous improvement innovation and the ongoing optimization of our processes reengineering much of what we do while delivering more personalized experiences to our members along the way.
Before I close I'd like to note that we remain confident in our ability to close the acquisition of Blue Cross and Blue Shield of Louisiana.
We're actively working with local regulators and stakeholders to address any remaining questions.
The deal offers tremendous value and opportunity for the people of Louisiana, including through the creation of a multibillion dollar foundation focused on improving their health and lives and we look forward to the privilege of serving as their lifetime trusted health partner.
As you will hear from John in just a moment the balance of our diverse set of businesses.
Mentum of our enterprise strategy and the decisive actions, we have taken to enhance our operating efficiency give us confidence in our ability to deliver strong growth in adjusted earnings per share in 2024.
In closing I want to thank all of our associates around the world for their dedication and hard work.
In the third quarter. We were also pleased to be named one of Americas greatest workplaces by Newsweek and the number one best large workplace in health care by Fortune.
It is the work of our associates to every day on behalf of the individuals. We are privileged to serve that allows us to deliver strong operating results in service of our bold purpose to improve the health of humanity collectively.
Collectively we are fueled by passion for having a positive impact on our communities our members and the environment.
With that.
Like to turn the call over to John to provide more on our operating results and outlook John .
Thank you Gail and good morning to everyone on the line as Gale mentioned earlier, we reported strong third quarter results.
Given outperformance against our initial expectations year to date, we have increased our outlook for adjusted earnings per share in 2023 to be greater than $33, reflecting growth consistent with our long term compound annual target of 12% to 15%.
Our outlook includes incremental investments, we have planned for the fourth quarter to support growth in Medicare advantage in 2024 and beyond.
Based on our updated guidance, our five year compound annual growth rate in earnings per share is expected to be 16%, which makes our vans health the only company in our sector to have exceeded 15% over that time frame.
We ended the third quarter with 47.3 million members, an increase of 42000 members year over year, driven by growth in Blue card and AC a membership.
During the quarter medical membership declined by 664000, driven by attrition in Medicaid due to eligibility re determinations and a new entrant into one of our state programs in July which resulted in a loss of approximately 140000 Mehdi.
<unk> members.
We are now three to four months in the Redetermination. So most of our states and this enrollment and many appears to be frontloaded with approximately three quarters of those terminated for Medicaid having loss coverage for administrative reasons.
We're seeing many consumers returned the Medicaid after being temporarily just enrolled while others are experiencing gaps in coverage before transitioning onto a see a exchange plans.
Given the patterns, we have observed to date, we expect re enrollment in the Medicaid and transitions to ACI exchange plans to accelerate.
Operating revenue in the third quarter was $42.5 billion, an increase of seven 2% over the prior year quarter.
Growth was driven by rate increases to cover overall trend in our health benefits business, coupled with double digit top line growth in Carolina, Rx driven by growth in pharmacy customers and the acquisition of bio plus.
The consolidated benefit expense ratio for the third quarter was 86, 8% an improvement of 40 basis points compared to the third quarter of last year, driven by premium rate adjustments cover medical cost trend and solid performance within our government business.
Now I would like to spend a moment discussing the business optimization charge, we announced as part of our results. This morning.
As Gale mentioned earlier, we took decisive action during the quarter to position our company for long term success by enhancing operating efficiency.
Refining the focus of our investments and optimizing our physical footprint.
These actions will ensure we stay well positioned to provide affordable products, while delivering on our commitments to all of our stakeholders.
As a result of this strategic review, we incurred a business optimization charge of approximately $700 million comprised of write offs and write downs of internally developed software and related assets.
Severance.
And leases associated with optimizing our physical footprint.
These actions will result in gross annual run rate operating expense savings of approximately $750 million per year.
A portion of which will be reinvested in growth opportunities, including Medicare advantage and the accelerated rollout of certain digital capabilities.
We are committed to doing even better and will continue to evaluate opportunities to enhance operating efficiency further.
Oh events health adjusted operating expense ratio in the third quarter was 11, 1%.
A decrease of 30 basis points over the prior year quarter.
However, the third quarter last year included additional out of period quality improvement expenses due to the accounting realignment, we announced them.
Excluding out of period quality improvement expenses in the third quarter of last year, our adjusted operating expense ratio would have been unchanged.
Adjusted operating game for the Enterprise grew 12.6% led by our health benefits business, which delivered double digit growth as we continue to optimize premium rates and products, while enhancing operating efficiency across the segment.
Operating margin for our health benefits business improved by 30 basis points year over year consistent with our expectations.
Caroline also delivered a strong quarter with growth in pharmacy customers and the acquisition of buyer plus propelling Carolina Rx to 17, and a 5% revenue growth.
Caroline Rx operating earnings included investments to support the build out of our specialty pharmacy and advanced home delivery capabilities, both of which will ramp up in the coming months and.
In addition comparisons to the third quarter of 2022 have been negatively affected by the out of period fee based revenue realized in the third quarter of last year.
And Caroline services strong growth in operating earnings was driven by expansion of Carillon post acute solutions and growth in our behavioral health business.
Turning to our balance sheet, we ended the third quarter with debt to capital ratio of 39, 2% in line with our expectations and consistent with our target range.
During the quarter, we repurchased approximately one 1 million shares of common stock for $480 million year to date, we've repurchased three 8 million shares of common stock for $1 7 billion pacing ahead of our full year outlook of approximately $2 billion.
We will remain opportunistic with share repurchases, especially considering the share price and recent volatility in the market.
As noted in our earnings release, we ended the quarter with $5 1 billion of board approved share repurchase authorization remaining.
We continue to maintain an appropriately prudent posture with respect to reserves days in claims payable stood at 48 six days at the end of the third quarter, an increase of 2.1 day sequentially and an increase of 0.9 days year over year.
As a reminder, we continue to expect days in claims payable to be in the low forties range over time and anticipate normalization towards this range in the coming quarters as cycle times, shorten and Covid related claims uncertainty recedes.
Operating cash flow was approximately $2 $6 billion or two times net income in the third quarter of 2023.
Excluding the impact of the business optimization charge I discussed earlier operating cash flow would have been one four times net income.
Given strong performance year to date, we're planning to make incremental investments in the fourth quarter in Medicare advantage marketing and retention and in capabilities and services that we expect will enhance customer satisfaction supporting our growth in 2024 and beyond.
While we are disappointed in the outcome of the recently released star quality ratings, we remain committed to this important line of business for the long term and are exploring all options to mitigate the financial impact on 2025.
Turning to 2024, although we are not planning to provide specific guidance on this call I would like to review some of the tailwind and headwinds that are known at this time, starting with our tailwind.
We continue to optimize our health benefits business, including by executing a multi year margin recovery and our commercial risk based margins to return to pre pandemic levels.
And expect margin improvement will continue next year.
We also anticipate improvement in Medicare earnings driven in part by corrective actions taken in our 2020 for Medicare advantage bids to improve financial performance in Puerto Rico, where we experienced significant challenges this year.
We expect continued momentum in Carolina, including growth in Carolina services, driven by new product launches and opportunities for meaningful external growth across businesses.
And the ramp up of bio plus and the launch of Carolina advanced home delivery, both of which the supplement ongoing momentum within Carolina Rex.
We also expect to enhance operating efficiency as a result of the actions. We took during the third quarter and will continue to look for opportunities to drive efficiency as we transform our cost structure over the long term.
And we expect today's higher interest rate environment to drive growth and investment income.
Our tail winds will be partially offset by or headwinds, which all relate to the Medicaid business, where we anticipate membership attrition associated with ongoing eligibility re determinations and the net loss of approximately 930000 additional members associated with changes in our footprint.
While Medicaid rates remain Actuarially sound. We're also mindful of the risks associated with evolving risk pools.
We'll continue to monitor and manage these dynamics closely.
Beyond 2020 for Medicaid offers attractive long term growth opportunities, notably and specialized populations and we anticipate a return to growth in 2025 and beyond.
Most importantly, the balance and resilience of our diverse businesses provides confidence in our near term outlook, while the earnings power of our health benefits and Carolina divisions position us to deliver on our long term growth commitments.
At this point in time, we believe the current consensus estimate for adjusted earnings per share of approximately $37 in 2024 is appropriate.
And we anticipate delivering another year of growth consistent with our long term compound annual growth rate target next year.
We look forward to providing more specific guidance on our fourth quarter earnings call.
Finally, as many of you know this will be my last earnings call as CFO of relevance health.
It has been a pleasure to serve this organization for more than 29 years, including the past seven in my current role.
I have been involved in 88 quarterly earnings calls since anthem went public in 2001, including 30 of them as Chief Financial Officer.
Every year is has its opportunities and challenges in 'twenty 'twenty four is no different.
We serve our members while furthering our mission and will continue to meet and exceed our shareholder commitments.
The balance and resilience of our businesses has created numerous tailwind and has allowed us to overcome various headwinds and I'm confident we will continue to do so.
I feel fortunate to have been part of what I believe to be the best leadership team in the industry and to be leaving the finance organization and an even stronger position than when I took over <unk>.
I've enjoyed engaging with all of you over the years and want to thank you for your support.
I look forward to supporting Mark Kay as he assumes the role of CFO , ensuring a smooth transition before retiring to spend more time with my family in the first quarter of next year.
With that operator, please open the line for questions.
Ladies and gentlemen, if you wish to ask a question. Please press Star then one on your telephone keypad, you'll hear a prompt that you had been cute you may withdraw your question at any time by pressing Star then two if youre using a speakerphone. Please pick up the handset before pressing the numbers once again, we ask that each participant limit themselves to a single question to allow ample time.
To respond to each analysts that may wish to participate in this portion of the call for our first question will go to the line of a J rice from UBS. Please go ahead.
Hi, everybody. Thanks.
Thanks, and John I wish you the best.
And the retirement, it's been great working with you and I really appreciate all the help over the years I Wonder if maybe just ask on the commercial.
Our margin improvement story, and what you've been doing there is.
If you ex out that this year this quarter what was the underlying cost trend for you did you see any pockets of a.
Our variance.
And utilization that are worth calling out and you guys have said on the recorded or the message. So far several times that you have.
There'll be some additional benefits on the commercial margin improvement story into next year is there any way to.
Size that or talk about that relative to how much gain you had this year from that repricing and the other things you're doing to improve the margin on the commercial side.
Hi, good morning, a J and thank you for the kind words at the beginning in terms of answering your question specifically, though.
Certainly obviously very im pleased with the performance of our health benefits businesses in the third quarter as well as year to date.
You know we've increased margins are quite significantly.
And the.
The health benefits segment margins, we guided to improve those 30 to 60 basis points year over year, and we're very much on track to deliver on that.
From a line of business in particular, you know, we're not providing specific margin information in specific a.
Detail on commercial versus Medicaid versus Medicare since we are operating this is a holistic health benefits segment.
But we do expect continue.
Continued improvement in the commercial margins in through 'twenty four as we are.
Continue to work on our our our strategy of ensuring that the pricing truly reflects the underlying cost structure as well as.
Additional penetrations in the fee based businesses, where we used to call. The five to one three to one strategy. So we felt very good about where we're heading and and our trajectory.
Trajectory into 2024, so thank you for the question Yeah. Thanks for the question a J and I'll just reiterate John's comments on commercial I think the team has done a really nice job as we shared this is a multi year journey in terms of the commercial business and we feel like we're right on track and our team has done a really nice job of balancing both membership retention as well as.
Getting our margins in line, where we where do you believe they need to be so thanks for the question and next question. Please.
Next we'll go to the line of Nathan Rich from Goldman Sachs. Please go ahead.
Great. Good morning, and thanks for the question and let me just Echo my congratulations John on your retirement I wanted to ask on the Medicare business. You know could you talk about the Gulf War, improving star scores. You know are you investing to kind of get back to the level that you're out with you know 65% of them.
Members enforced our plans and over what period are you thinking and how should we think about the magnitude of the incremental investments planned for the fourth quarter as well as into next year.
And any comment on the kind of how long it would take to reach the run rate of optimization savings of 750 million that you talked about would be helpful. As well. Thank you.
Thanks for the question Nathan Let me I anticipate a number of questions around star So, perhaps I'll just address that topic holistically.
Yeah.
Starts for us as an enterprise priority, if I want to start with that and we have a long term commitment to the MA business and are committed to offering high quality plans for seniors, but as I said in my opening comments, we're extremely disappointed on the recent results of the stars and the decline that we saw in the number of our members enforced our plans for payment year two.
Five just a little background I think might help we experienced some declines in the cap survey scores, which were the most heavily weighted measures and we were also impacted by that new CMS statistical methodology, which caused some significant increases in cut points.
Think about our performance.
Proved and about half of the star measures, but those were not enough to offset the impact of the heavily weighted measures and the higher cut points. Therefore, having three of our largest contracts suffered in our star ratings, which you've noted.
As I shared we have already started making those investments and earlier. This year, we were specifically address it addressing areas around the heightened focus for caps that drove the decline.
One of the very specific examples is scaling the my health advocate model, which again I shared a little bit about that in my opening remarks.
The model is unique and highly personalized customer service and its tailored specifically to help members with problem central to the caps improvement.
The model that we've had in place in our commercial business and it's been incredibly successful.
Other areas that we saw in the data where about enhancing our core and supplemental benefits to reduce members out of pocket cost, which showed up in our stars results and also simplifying how those members use our over the counter benefits.
We've gone on a journey around value based care as we've shared with you and we're going to continue to accelerate that and embed some.
Some of those results as well into our contracting process and were also made took steps last year to improve the processes around clinical decision Appeals, which was also an area around the higher cut points in terms of financial impact, we expect a reduction in 2000 and twenty-five quality bonus revenue of approximately $500 million.
After upsets after offsets from our contracting provisions.
As John and I, both shared we've already aggressively gone to mitigate that headwind for 25 and.
And we do have a number of levers at our disposal, including contract diversification operating expense efficiencies capital deployment and looking at targeted network and product enhancements overall, we're going to continue to work on that our timelines have already begun on this I feel we have a very very good line of sight to.
The opportunities that we have and again because of the diversified business model that we've talked to you about we feel that the earnings power of our combined businesses between our health benefits and Caroline allow us to continue to feel comfortable about our adjusted earnings per share growth annually of 12% to 15% over the long term. So thanks <unk>.
<unk> for the question I appreciate the opportunity to Holistically address what we're doing about stars next question. Please.
Next we'll go to the line of Lisa Gill from Jpmorgan. Please go ahead.
Yeah, Hi, good morning. This is Cal on for Lisa I, just wanted to add my thanks to John wishing you all the best.
Switching to Medicaid I appreciate all the color on the Redetermination and the Frontloaded dis enrollment trends can you talk about how membership is trending relative to what you expected earlier this year and how acuity mix is trending and then related on the commercial side, how membership growth is tracking at the employer group and individual businesses are you guys getting.
The growth you anticipated and is there anything to call out on the margin side as you think about this year and into 2024.
Yeah.
Thank you for the question Kyle and certainly appreciate all the all the commentary but.
First of all on Medicaid.
The Medicaid this enrollment as we said has been very much front loaded and.
In terms of how that compares to.
To our expectations.
That would be our expectations, whereas it would've been more normalized over a 12 to 14 month process.
We are what we're seeing is that there is administrative churn and that a lot of people are losing Medicaid coverage temporarily and then they're coming back on yeah, we're re enrolling folks.
30, 60 90 days after they were just some role and that was that dynamic was not part of the original thought process, but it is certainly part of the reality Oh I'd like to say September 30th or December 31st for that matter is just going to be one point in time over a 12 to 14 months process.
What we have not seen maybe the most important element is that you know at the beginning of the year. When we discuss that we think that we're gonna going to retain about 40% to 45% of all Medicaid members, who receive coverage during the phe. We still believe that is a very good estimate.
By the time the dust settles in the third quarter of 2024, and we feel good about that estimate is just going to be a little bumpier rockier, along the way because of the gaps in coverage because of the administrative churn.
And on the on the commercial side.
Seeing really excellent growth in the individual HCA.
Once that Redetermination began in a particular state.
The level of applications on the ACA products were up three times the amount that they were prior to that.
So it really does point to the fact that we do have the catcher's Mitt and inaction.
The employer sponsored side, yeah, that's actually going maybe a little bit less than we had anticipated. So individually ICA is growing a little bit faster employer sponsored a little bit slower, but all in we really do believe that by the time, we get through this entire process, which won't be completed until sometime.
In the third quarter of 2024 that the estimates that we provided at the end of the year will prove to be pretty good estimates. So hopefully that helps. Thank you next question. Please.
Next we'll go to the line of Stephen Baxter from Wells Fargo. Please go ahead.
Hi, Thanks, I'm wanted to follow up on the Medicaid Redetermination question. There. So I appreciate all that commentary you just made would it be fair to say that at this point you know in part driven by the fact that you've gotten seemingly good an actuarially sound rate updates from your states that you haven't really seen all that much normalization of your margins in FY2023 I believe you came into the year.
You're thinking that you performed quite well above your long term targeted range and there might be some pressure, but love to just get an update on how that's performed in 2023, and how you're thinking or potentially considering that in your comments on 'twenty 'twenty four. Thank you, yes sure no. Thank you very much for that question and actually I think Cal did ask about acuity.
Well, so hopefully I'll address both of those are here with this answer.
Medicaid continues to be doing very well are very much in line with our expectations and in line with Ah.
With what we saw coming.
The one thing that I will reinforce is that in the rating formulas in the future or currently now is an acuity factor.
That's supposed to take changes in acuity and the consideration that factor was not in place in 2019, so comparisons to 2019 really arent all that relevant at this point in time for that purpose.
What we've seen thus far though it was very little change in the overall acuity of the book.
We are taking a very close look at that and as I stated in my prepared comments, we're going to be.
Be monitoring extremely closely and working with our states. So I'm very happy to report that all of the renewals that we've had what's been discussions we've had with the states. Thus far we have been provided actuarially sound rates and we believe with Actuarially sound rates, we can continue to deliver on Medicaid.
Consistent with how we have in the past, providing a lot of benefits to the beneficiaries and providing returns to the shareholders. So thank you, yes, thanks, John and I think just to put a sort of summary on that yeah. We feel we've got great visibility into the rest of this year and the.
<unk> is around 24, I've been incredibly productive with about 50% of our premiums.
Good visibility there. So we think that those conversations are going well and things are tracking according to expectations. So thanks for the question and next question. Please.
Next we'll go to the line of Ben Hendrix from RBC capital markets. Please go ahead.
Thank you very much I, just also want to reiterate congratulations to John and thank you for all the help.
Just wanted to circle up with a quick follow up on May I. Appreciate all the questions on my health advocate and efforts. There I just wanted to know if there's any early thoughts on how much of the headwind you can mitigate with contract.
Diversification and then kind of what the timeline is for getting all of those approvals at the state level to carry that forward. Thank you. Yes. Thanks for the question Ben as we think about that as I said, we've got a number of levers at our disposal and so I would focus on that but in terms of the contract diversification about a third of the members.
Affected where in the group contract. So we'll look at moving those potentially to a four star contract, but again I just want to reiterate it's just one lever in our toolbox and so we're not just looking at that but we're looking across all of the things to have a mitigation for 2025. So thanks again for the question and again a lot happening in our enterprise.
The efforts there to make sure that we remediate and stay very focused this is our enterprise priority for US next question. Please.
Next we'll go to the line of Kevin Fischbeck from Bank of America. Please go ahead.
Great Thanks, and cause that to my congratulations to John as well I guess as far as the.
The cost cutting that this cost me answer was quite large and I guess I just want to get a little more color on exactly kind of what.
What's driving this it sounds like this was all before.
Starz who's gonna be off for 25 years. It sounds like it was more of a 'twenty four issue I think I think in the comments you said something along the line because it's going to help you deliver lower cost to customers, but also addresses some of the uncertainty in 'twenty to 'twenty four so just wanted a little more color on that how much of this is going to improve benefits and M. A versus I think he made technology investments.
Just just a little more rationale for the move why its so big and then if the.
If youre doing it this move now how do you think about your ability to find significant savings to offset stars in 2025.
Yeah. Thanks, Thanks for the question, Kevin I think.
Let me put this in a little perspective because.
It's important to know we're always evaluating our cost structure and as we headed into 2024, we took very proactive and decisive action in the third quarter. We wanted a couple of things one increase our financial and operational flexibility and also ensure that we're positioned to deliver on our commitments to stakeholders. So if you look at the charge in tow.
I mean, it really is kind of focused in three areas of cost management and I think it's prudent to continue to always look at your cost structure is something we've been doing is obviously as we've been looking to manage that and let me. Let me go through the three pieces because I think it's important first as you know and we've talked about quite a bit on these calls we've been investing over the past several years.
<unk> and modernizing our infrastructure, particularly around digital capabilities and migrating a lot of our applications to the cloud consolidating our systems and our data and now most recently used cases, I'm using AI to drive greater efficiencies.
Pace of technological innovation has changed and it continues to accelerate and again as I said, we're committed to deploying those are responsibly quickly in our company. So what youre seeing in that first bucket is the write down of some of those legacy processes that have now been replaced with our support that support our long term goals with digital and AI and other things.
And we've gone through that first phase that we've been talking about over the last several years on consolidation data aggregation et cetera.
Second adjustments were really tired workforce and that again.
Last year, we aligned our structure around benefits and services. This gave us an opportunity to look at redundancies across our business and our processes and eliminate handoffs streamline very focused on ensuring that members because of our large benefit businesses can move between those businesses. It is an integral part of our strategy and.
So that's been an important part of streamlining our work processes simplifying our member experiences and so as you think about the investments that we've been making in technology, particularly our front door applications and things that automate some of our work this as an opportunity for us to to make sure that we had the right scaling of our workforce and <unk>.
In the bigger scheme. These are not significant numbers, but again I think it's really important that we constantly look at our cost structure and then the last part is we went to a hybrid work environment, we've been evaluating the size and location of our work sites and we took the opportunity to further optimize those to make sure that we were located in the right places and had the right footprints.
So as you think about all of those it's an approximately $700 million of.
Charges and it results in a runway run rate of about $750 million again, as John said it doesn't all drop to the bottom line.
But that's we think is important to support our long term growth in our enterprise strategy. So that gives you a bit of a sense of how we thought about these as an ongoing opportunity to continue to optimize our cost, which we think is important for affordability in health care. So thanks very much for the question and next question.
Next we'll go to the line of Sarah James from Cantor Fitzgerald. Please go ahead.
Thank you and Echo my congratulations to John I was hoping that you guys could give a little bit more context around the recapture rate of the terminated Medicaid lives. So are you seeing.
Our recapture within Medicaid for the appeal process, yet and then on the AC side, how do you think about the 30% recapture are maturing into 'twenty for with your members. But then also potentially there is more people looking for easy plans in 'twenty four.
Yeah.
Thank you for the question Sarah So you know in terms of.
The Medicaid Redetermination as I stated three to four months three to four months into the process and it's a little early to have definitive.
And they're very specific data points, but we do have a certainly the bias we've seen.
10% to 20% of the members who lost coverage in Medicaid in June re enroll with us in the third quarter.
So we certainly expect trends like that to continue.
It's just one data point and certainly there's more time, but there are gaps in coverage and then on the individual HCA.
We are seeing by the time that folks leave Medicaid there's typically a couple of months gap before they become enrolled in HCA plan. So some of the some of the membership this enrollment as temporary and a and theres gaps in coverage. So we've seen that throughout but we think we have a great opportunity on a.
14 Blue States.
You look at it the number of members that were added to Medicaid and our 14 Blue States that was about 8 million people across all 14 states about a million and half of those were enrolled in Alabama health Medicaid plans, which means that those other six and a half million that went to a different <unk>.
Harrier.
If I if that different carrier is.
Able to retain 40% to 45% of those Medicaid similar to us, which I think is a reasonable expectation that means that over half of the $6 5 million are in play and we have leading market share in virtually every market. We operate in both an employer sponsored as well as a very.
Very strong ago HCA products and so we do believe that you will see an acceleration.
Individually see a membership.
<unk> into early 'twenty, four and mid 'twenty four fro event itself. So hopefully that answers your questions. Thank you for the question Yeah. Thanks, John and Sarah I think just to sort of put a bow on this I think it's really important just to frame. It 75, almost 75% or administrative just enrollment and then you know over almost 30.
7% of our children under 18. So those are two areas. Obviously, we're intensely focus on AR and Theres, a timing issue associated with that so there's some delays in coverage and some coverage gaps and we've been working really closely with our states, but as John said, we are seeing some encouraging signs where that 30% or more of our Medicaid members who are termed.
Prior to the end of June and are now returning and retaining coverage with elevated so we expect that re enrollment to accelerate in the coming quarters. So I think that's important to keep in mind is we're all working through this process and certainly the states are working through this process and we have been continuing to adapt how we get to these members, particularly the ones that were just enrolled for them.
Ministry to reasons, so again, we felt pretty comfortable with that.
The numbers that we shared in the guidelines we shut in and we are seeing pick up certainly in the individual business is this progressive so thanks again for the question next question. Please.
Next we'll go to the line of Michael Hall from Morgan Stanley . Please go ahead.
Thanks, and congrats to John as well.
Just to ask a quick question first regarding Bioplast wanted to confirm did you mentioned that youre going to start migrating specialty scripts away from their legacy platform. Early next year would that imply you've made the decision to endorse your specialty drug spend away from CBS and then my real question.
Regarding I mean, sorry ratings in terms of the improvement efforts for cats, specifically, how much of the overall underperformance would you attribute to the providers of it.
How can you fix it does result for that without actually having ownership of providers. How can you effectively drive your provider networks and make the necessary changes to improve your results curious what the plan is there.
Thanks for the question Michael I'll have Pete start and then I'll address your question on M&A.
Thanks for the question Michael Yes to answer your question directly we are beginning the migration to bio plus starting January one and again just to reiterate we've.
We've been very very focused on last year with regard to implementation and integration of bio plus as it relates to our specialty strategy I'm a lot of the focus this year has been building the infrastructure and the team. So that we have the appropriate scale and capacity to take on yellow van sell volume and we feel very good about that as Gail noted in his prepared remarks, we're accelerating.
Rating the timeline in that regard and we are moving forward with that but for January one and again. This is all a part of our strategy in pharmacy, just to reiterate and that is to in source. The strategic levers that matter specialty pharmacy is very critical to that as well as what we're doing in advance on delivery. So again excited about that and yes. It is launched in January .
One.
And to the second part of your question as we dealt in and really look deeply at sort of the drivers there, especially around the three contracts and sort of what the cut points, where you know I guess I would say there's a couple of things one has been easier navigation for our members. So I would not say, it's because of ownership or lack of ownership, but I will address sort of value based care remember.
This with measurement around your 'twenty two we've made significant progress around moving a lot of our contracts to value based care and embedding that into the way we do it and we've also worked closely with Aggregators and have been building quite frankly, the numbers than that so we do feel that our strategies are intensely focused and our health.
Navigator will significantly help them the other area quite frankly around the cut points that impacted us was appeals and grievances and some of our processes back in 2022, those were very high performing contracts in the past and the cut points, while still good performance for US we're below that at that point. So I think those are very specific things that we can address.
Yes.
I wanted I wanted to take a moment, though I think to talk about where we are in value based care because I think it is important to Medicare advantage is an area that we've been intensely focused side.
I mentioned on the primary care side, we've been working with a number of Aggregators plus increasing the amount of value based care, but more importantly in embedding in those contracts quality and outcome measures as well as access and service and I think those will have it continued I guess have an important impact on those the other opportunity that we have is around spur.
Salty cure and we have been doing quite a bit of work on aggregation of specialty care.
And particularly carving in high complex areas on specialty medical spend that's an area, where we see significant opportunities and don't see that as a really mature part of the market. Today. For example, Caroline is launching in January in oncology specialized care model with our affiliated health plans and it's allowing.
All sort of more broadly commercialize that opportunity. We also see opportunities in muscular skeletal renal and more and I think this is a really differentiated focus because we think about where members are very focused on access to surround specialty care and I think we have a unique opportunity from both opex.
Our innovation, our technology and the clinical expertise we offer.
To run that through Caroline with our health benefits, particularly in Medicare, but also across all of our lines of business.
And that's going to be an important strength for us and that's an area that I think in the specialty enablement will help our Medicare advantage stars, but also help our patients get better access to that care. So that's a we think it's a differentiator but overall your question I think we're very focused on the areas that drove.
Some of the areas within those three contracts and we feel we have very good line of sight to what they were in a lot of them were easier navigation for our members and making sure that it was a much more personalized experience than we've had in the past and then again, ensuring that our supplemental benefits and over the counter or simpler and easier to use and we shared a little bit of that and we made those changes actually.
Our bids over the last couple of years. So thanks very much for the question Michael The next question. Please.
Next we'll go to the line of Josh Raskin from Nephron Research. Please go ahead.
Hi, Thanks, I'll add my congrats for 88 quarters for John as well.
My question can you speak to the strategy of how care lawn and benefits.
Segments aimed to really work together all the time I'm, specifically interested in how you tie the various companies within carillon together and then also I'm at care delivery side as part of the answer and then lastly are there any capabilities certain capabilities that you think are missing or would be helpful. For all of ads in terms of putting together that totality of strategy.
Yeah. Thanks, Thanks for that question, Josh we'd love to share more about our strategy I'm going to have Pete Italian talk about it as you know he leads that part of our business.
Yes, no. Thanks. Thanks for the question I really appreciate it I think it is a good opportunity to talk about our strategy Holistically as Gail mentioned in her prepared remarks, we talk about whole health, an integrated care and driving affordability, but I really I really want to tag off of what Gil just talked about because I really do believe it's what we're focused on and differentiating ourselves on.
And that is looking at high cost high spend areas of health care, we face off with our health plan partners, we identify those areas specialty care, because they have tremendous opportunity and a real differentiator Gale mentioned some areas that are that are critically important to us as we move forward and this is across all lines of business not one particular line of business, but when you think about high spend areas like oncology.
Allergy like M. S. K like Reno, we are a wonderful opportunity to manage the member Holistically and take full risk on those members now importantly, that's a it's a big part of our strategy in terms of assuming full risk on those categories driving earnings through Carolina run rate nonregulated entity and also focusing on areas.
And profit pools that are growing where we have a wonderful commercialization opportunity and how this all plays together is we face off with elements health. We identify these areas we drive capitate at full risk and many of these instances and then we deploy those capabilities externally. This is really playing through in a nice way and we're seeing that.
Play through in terms of our our growth trajectory to just again reiterate what Gil said in January of this year, we're gonna be launching an oncology program at full risk. We are also looking at taking full risk on the seriously mentally ill.
And in behavioral health, where we're not only managing behavioral health, but the physical health side and this is all the type of thing that is playing through into our external pipeline, which we're seeing you know grow grow nicely. So I really appreciate the question, Josh I think Oh, yeah and by the way you did ask questions around additional capabilities I would say that that M&A.
Also as an important part of our strategy as we as we move forward and when you think about these highly specialized areas of care. We're not naive to think that we have the capabilities internally to handle all of it when you think about M. S. K. When you think about renal even though we're doing around the seriously mentally ill, we will be looking to not only partnerships, but acquisitions that can.
Help us in that regard.
Thanks, Pete and thanks for the question and I think if I just summer it up summarize everything Pete said.
We're really working in Carolina Cross kind of four major areas, obviously pharmacy with Carolina Rx and then three pillars inside of our Carolina services business care delivery, our insights in our behavioral health in all of those come together in all of Pizza and we have a great opportunity to provide greater certainty and cost management.
Our owned health businesses, but externally commercialize that and seen a lot of momentum going into 'twenty four on that prove it on ourselves and then show the market capabilities, particularly around the blues system. So thanks again for the question Josh.
This will be our last question.
And for our final question will go to the line of Justin Lake from Wolfe Research. Please go ahead.
Thanks for squeezing me in at all last add my thanks to John for everything over the years really appreciate it.
Along those lines, maybe you can give us a little color around the CFO search and what you expect mark to bring to the organization and then just curious if you have any early views on 2020 for Medicare advantage membership growth, both for Alabama, and the market overall.
Thanks, Thanks for the question, Justin and first of all I will also offer my appreciation to John for his guidance and his counsel and honestly our partnership over the time that I have been CEO , John and Mark has been here now for about a month, we're excited about having mark Kaye.
Join us as you know he was the CFO of Moody's.
Mark brings is an actuary by training brings an incredible insight to our business he and John have been working hand in hand on the transition and John will be continuing as an advisor to me through the first quarter as you heard in his opening remarks.
I think our I think we're at an incredible time in our business. We have great growth, we have a very diversified business and I'm excited about mark joining our team and excited about the whole team.
And thank John we will all miss him, but he deserves time with his family and an opportunity to do things and work on his golf game as you know Justin so so from that and I'm going to ask Felicia to comment a little bit about Medicare advantage. As you know AEP has just started so it's really very early days, but may be Felicia.
I can share a few comments about her thoughts and what we expect.
Good morning, Justin and thank you.
We are actually very excited about AEP. It's at scale reference we are only three days then, but we're actually very pleased with the response, we have from our brokerage regarding the competitive positioning of our benefits and we believe that we will be able to grow membership above the market.
In excess of some strategic decisions that we made around targeted market exit so I want to point out that we may be very intentional and discrete decision to leave some markets that had been underperforming for us for some period of time strategically it was the right thing to do so that we can make sure we are.
We're focused on those markets, where we have an opportunity to be very successful deliver strong benefit for the members that we're privileged to serve so as we think about where we are today, we feel good about our positioning as I said, we're very early in terms of where we are but we believe as we head into 2024, we're going to be able to deliver solid.
But as I said I believe that would be above the overall market rate.
Based on where we're positioned so thank you very much for the question well. Thank you Felicia and thank you to all of you on the line for your continued support and for joining us today.
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